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The Deficit Commission Refuses to Talk to Anyone Who Knows About the Economy Print
Sunday, 11 July 2010 21:08

Erskine Bowles, the co-chair of President Obama's Deficit Commission and a director of the Wall Street investment bank Morgan Stanley, claimed that the current economic crisis (which is projected to add more than $4 trillion to the national debt) was "largely unforeseen." This is not true. Competent economists saw the crisis as an inevitable outcome of the housing bubble. It is remarkable that the deficit commission seems to be relying exclusively on economists who could not see this $8 trillion bubble, the collapse of which wrecked the economy.

The commission also does not appear to be considering any measures that would challenge powerful interest groups like the pharmaceutical industry, the insurance industry, highly-paid medical specialists, or the Wall Street banks. Rather than incur the wrath of these powerful interest groups by reining in medical expenses or reducing the rents earned by Wall Street bankers, the commission seems intent on taking back Social Security and Medicare benefits for ordinary workers. The reporters covering the commission should be reporting on the failure of the commission to follow its mandate in this respect.

 
Franchise Fantasies and the "Financial Crisis" Print
Saturday, 10 July 2010 10:08

The people who could not see an $8 trillion housing bubble before it wrecked the economy are still having a hard time seeing it even after it wrecked the economy. They fail to understand that the economy's problem is due to a loss of demand. We have seen more than $16 trillion in wealth vanish. The demand generated by this wealth cannot be easily replaced without strong action from the government.

While this basic point seems pretty straightforward, the media repeatedly refer to the downturn as a financial crisis, implying that the problem is that the financial system is not operating properly. In this vein, the NYT had a lengthy piece that reported on the difficulties that franchise owners are having in getting financing in order to maintain or expand their operations.

It is undoubtedly true that franchise owners are having more problems getting credit, but this is primarily due to the weak economy, not the state of the financial system. In a weak economy, any operation's prospects are more questionable, which makes them a greater credit risk for lenders.

This can be easily demonstrated. Many firms that compete with the franchises do not franchise their operations. Instead, the company owns the individual outlets. These large companies (e.g Wal-Mart and many McDonalds) have no difficulty getting access to credit right now, in fact interest rates are currently at historic lows. If there was a market for franchises who want to expand, but can't get access to credit, we should expect to see the large chains jumping in to fill the gap. In fact, the opposite is happening, most major stores have curtailed their expansion plans because of the downturn.

So, chalk this one up as fiction.

 
May Increase in Inventories Largest Since March Print
Saturday, 10 July 2010 07:08

Yes, that would be another way of saying that the May increase was larger than the April rise, but that is what USA Today told readers. Actually inventories are a very important part of the recent pattern of growth in the economy.

During a recession inventories fluctuations tend to amplify swings substantially since it is the rate of change in the change of the stock of inventory (acceleration or deceleration) that affects GDP growth. During the downturn firms start to run down their inventories making a negative contribution to growth. When inventories stabilize, the fact that they are no longer declining adds to growth. Then when firms start to rebuild their inventories it adds even more to growth. Once firms have attained a normal rate of inventory accumulation, then inventories will provide little additional boost to growth even if firms continue to add to their inventories. 

This is very clear in the current recovery. The economy shrank at a -0.7 percent annual rate in the second quarter of 2009, it rose at a 2.2 percent rate in the third quarter, a 5.6 percent rate in the fourth quarter. The growth rate fell back to a 2.7 percent rate in the first quarter of this year. Nearly all of this variation was due to changes in the rate of inventory accumulation. There was little change in the pace of final demand growth over the last four quarters.

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The rate of inventory accumulation in the first quarter of 2010 was approaching its normal level. While inventory accumulation can be faster in any given quarter, it is unlikely to provide the sort of boost to growth that it did over the last three quarters. This means that GDP growth will be closer to the rate of final demand growth, which is looking pretty weak at the moment.
 
Miami Herald Invents a "Consensus Among Economists" to Push Social Security Cuts Print
Friday, 09 July 2010 21:40

The Miami Herald took first place in the contest to have the most inaccurate article on Social Security when it printed without challenge an assertion that: "For awhile, there's been a consensus among economists that raising the retirement age makes a lot of sense." This is obviously not true, since there is no shortage of economists who do not agree with this view and it is quite possible that a majority of economists do not agree with this position. Any reporter who had researched this topic at all would know that the assertion is not true and would not present it to readers as being true. 

Instead the article presented almost exclusively the views of people calling for cuts in Social Security. Remarkably, the article included no discussion at all of the likely financial situation of the retirees who would see their benefits cuts as a result of an increase in the retirement age. These workers have seen most of their savings wiped out by the collapse of the housing bubble and the plunge in the stock market. No "adult discussion" [a term used in the article] of Social Security can occur with assessing the situation of the people who would be affected by proposed benefit cuts. 

The article also never once mentions the possibility of addressing the projected long-term shortfalls in Social Security by raising the cap on income subject to the Social Security tax or by raising the tax rate. Polls consistently show that these positions are far more popular than the raising the retirement age.

In fact, the people attending a set of public meetings last week held by America Speaks, an organization funded by Peter Peterson, a long-time foe of Social Security, overwhelmingly preferred raising the cap on the Social Security tax to increasing the retirement age. This was even after being presented with a heavily biased budget book prepared by America Speaks. There is no way to write a balanced story on Social Security without mentioning revenue options.

The article also makes a point of discussing the increases in life expectancy without noting that tax rate has been increased substantially over the last 70 years, precisely to cover the cost of a longer retirement. Again, it is impossible to write a balanced article without pointing out that current workers have paid higher tax rates in order to finance a longer retirement.

The article also implies that it would be reasonable to cut Social Security benefits to finance other parts of the government. This would mean describing the payroll tax as a "Social Security" tax even though the money was being used to finance the war in Afghanistan or other expenditures. It is unlikely that this would be a popular position. If people realized that their representatives in Congress wanted to use taxes designated for Social Security for other purposes -- in effect defaulting on the government bonds held by the Social Security trust fund -- it is likely that many would be voted out of office.

Impartial reporters should be pointing out to readers what members of Congress are trying to do with their Social Security tax dollars. There would be few items that would qualify as a greater political scandal.

 
Competent Economists Were Not Kept Awake Worrying About "a collapse in the value of the dollar and of U.S. government securities" Print
Friday, 09 July 2010 06:15

In a discussion of trade imbalances the Washington Post told readers that: "it was that risk -- of a collapse in the value of the dollar and of U.S. government securities -- that kept many economists up at night."Actually, competent economists were not terribly worried about this nearly impossible scenario.

China and other countries were deliberately propping up the value of the dollar in order to sustain their exports to the United States. While these countries may at one point back away from this policy because they decide it is no longer in their interest, it is almost inconceivable that they would flip overnight to the opposite policy of allowing their currencies to soar against the dollar. The idea that China would allow an exchange rate of say 4 yuan to the dollar or that Europe would tolerate an exchange of 2 dollars to the euro is almost absurd on its face. The market for these countries' exports in the United States would collapse at these exchange rates, while U.S. exports (we still export more $1.7 trillion annually) would become hypercompetitive in other countries, wiping out domestic competition.

Since the story of a dollar collapse was so far-fetched, competent economists did not lose sleep over it. They did lose sleep over the housing bubble, the collapse of which produced the economic disaster the country is now witnessing. (Unfortunately, the folks running economic policy were not among the group of economists paying attention to the housing bubble.)

Strangely, currency prices receive only passing mention in this piece on trade imbalances. This is the mechanism for adjustment. In order to move the U.S. trade deficit closer to balance, the dollar will have to fall against other currencies. There is no other plausible mechanism. It is difficult to understand why this point was not mentioned.

It is worth noting that the savings rate has increased by about 2.0 percentage points more than is implied in this article. This is the result of the statistical discrepancy in GDP accounting. At the peak of the bubble, capital gains income was showing up on the income side as ordinary income. This overstated true income and therefore overstated the savings rate. With the collapse of the housing bubble and plunge in stock prices capital gains income is no longer showing up as income in GDP accounts to the same extent. Therefore the savings rate is no longer overstated. This adjustment means that the savings rate has risen by about 2.0 percentage points more than the official data show.

 

[Addendum: In response to comments about the capital gains issue -- I am referring to the NIPA measure of income and savings, which is not supposed to count capital gains income. However, capital gains income did show up in this measure during the years near the peak of the stock and housing bubbles. The statistical discrepancy turned strongly negative during these years, which means that measured income side GDP was larger than measured output side GDP. (By definition, they should be equal, although measured output side is usually larger.)

We regressed the statistical discrepancy on lagged increases in stock and housing prices. The fit was extremely strong, with a very simple regression explaining almost 60 percent of the variation in the statistical discrepancy. Based on this analysis, I think it's pretty clear that the official data substantially overstate income and therefore the saving rate both at the end of the 90s and the years 2004-2007.]

 
If President Obama's Anti-Business Attitude Is Hurting Investment, Can Someone Explain How Print
Friday, 09 July 2010 04:18

In his column this morning, Paul Krugman takes issue with the claim that the Obama administration's anti-business attitude is responsible for the economy's weak investment. Krugman makes the obvious point that, given the sharp falloff in output, investment is not especially weak.

However, it would be fair to turn the tables on the people making this argument, where is the evidence that Obama's regulations have hurt investment? Some firms are affected by new regulations more than others, if his regulations are hurting investment then we should see the weakest performance in the firms that are most affected.

For example, the health care bill (the most-often cited "job-killer") imposes new requirements on business. This is true and it gives us what in principle would be a testable hypothesis. Are the
businesses that are going to be subject to new requirements (mid size firms) performing worse relative to firms that already overwhelming met these requirements (large firms that overwhelming provided
coverage) or firms that are not going to be subject to requirements (fewer than 50 workers). None of the "Obama is killing investment crowd" have even tried to sketch this one out. A similar analysis could be constructed with regards to most other regulations.

It would be interesting to see if the evidence actually supported the anti-business hypothesis in the case of health care or any other regulation. My guess is that it doesn't, but until someone produces such evidence, the anti-business explanation for weak investment is basically just name calling.


 
The Post Makes It Up on Fed Stimulus Print
Thursday, 08 July 2010 06:49

In an article discussing measures that the Fed could take to provide a boost to the economy, the Washington Post tells readers:

"When the Fed was buying $300 billion in Treasurys in mid-2009, part of its try-everything approach to dealing with the crisis, rates on 10-year bonds temporarily spiked amid concerns that the Fed was "monetizing the debt," or printing money to fund budget deficits. With deficit concerns having deepened in the past year, such fears could be even more pronounced now."

The markets don't tell anyone why they moved in a certain direction at a specific time. It is not clear what spike the article is referring to, but the cause of the spike is entirely the interpretation of the Post and should clearly be identified that way. The Post does not really know what caused interest rates to rise, it is presenting its speculation to readers as a fact that is then used to support the case for a more cautious monetary policy.

 
The NYT Wants Debates Over Class to be Debates Over Culture Print
Thursday, 08 July 2010 04:24

The NYT noted the split within the Democratic Party between those who want to see more stimulus and those who want the government to focus on deficit reduction. It then told readers:

"But in a more fundamental way, the argument over fiscal policy represents the churning of a cultural fault line that has defined and destabilized Democratic politics pretty much since the onset of the Great Society."

Umm, "cultural fault line?" I remember the 60s. There were student and anti-war types on one side and the Democratic Party establishment on the other side, a key bulwark of which were the unions. What does this split have to do with the current divide, which places anti-war types and unions on the same side against Wall Street and business oriented Democrats on the other side?

The focus on "culture" rather than economics leads to further confusion throughout the piece. The article argues the need to rein in entitlement spending. No one disputes the need to reduce the trend growth rate in spending on Medicare and Medicaid. The question is how this is accomplished.

The Wall Street Democrats want to cut spending by reducing benefits under these programs. The "traditional" Democrats want to reduce spending by making the U.S. health care system more efficient. If per person health care costs were the same as in the U.S. as any other wealthy country, then the United States would be looking at enormous surpluses in the long-term, not deficits. However, fixing the U.S. health care system would involve reducing the profits of the insurance industry, the pharmaceutical industry and other powerful interest groups in the health care sector. The Wall Street Democrats do not want to hurt these interest groups while the traditional Democrats do.

Read more...

 

 
The Washington Post Has Not Heard that the Retirement Age for Social Security Has Been Raised Print
Wednesday, 07 July 2010 05:08

In her column bashing AFL-CIO President Rich Trumka, Washington Post columnist Ruth Marcus complains that Trumka got angry at the suggestion that the retirement age for Social Security be raised in response to the increase in life expectancy in recent decades. Apparently, Ms. Marcus did not know that the retirement age has been raised already. In 1983, Congress voted to raise the normal retirement age from 65 to 67 over the period from 2002 to 2022. Ms. Marcus seems unaware of this 27 year-old law.

Marcus also implies that Trumka believes that the country's fiscal problems can be solved exclusively by taxing the rich. This is  not true. Trumka and the AFL-CIO have consistently been strong proponents of measures that would make the U.S. health care system more efficient, such as a public health insurance option and negotiated prices for prescription drugs.

Such measures would make health care much more affordable for both the public and private sector. If per person health care costs in the United States were the same as in any other wealthy country, the United States would be looking at huge long-term budget surpluses rather than deficits. It is difficult to understand how Marcus could have missed this aspect of Trumka's political  agenda.

It is important also to note that measures that reduce the trend toward growing inequality, such as improved corporate governance that reins in CEO pay or a trade policy that is not designed to increase inequality, would also have beneficial budgetary impact. As more income goes to those at the middle and bottom, there would be less need for various government transfer programs. It would be useful if Post columnists would try to directly address the agenda of the unions, rather than caricature it in order to discredit it.

 
India's Enforcement of Patent Laws Should Not Affect Drug Manufacturer's Investment Decisions Print
Wednesday, 07 July 2010 04:53

The NYT had an article on the growth on India's pharmaceutical industry in which it raised its enforcement of patent laws as an issue affecting manufacturers' decision to locate in India. There is no obvious reason why there should be any relationship between the two.

Scientists in India can gain the knowledge to manufacture patent protected drugs regardless of where the manufacturing operations are located. Placing the facilities within India would minimally increase this ability. It is difficult to believe that this additional risk would be an important consideration for drug companies although they may use their location decision as a way to coerce India and other countries to adopt more protectionist patent regimes.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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